The future of air cargo: how to adapt

The future of air cargo: how to adapt

Vice President of Freight Transportation | JDA Software’s Pricing and Revenue Management Group

There is a fundamental shift taking place in the air cargo industry.  According to a recent survey by investment firm Stifel, Nicolaus & Co. and UK research firm Transport Intelligence Ltd., more than 80% of shippers and freight forwarders expect to migrate away from air freight to ocean.

This shift is driven by cost-conscious shippers ‘trading down’ to lower-cost ocean services from traditional airport-to-airport air freight.  This move was validated by Cathay Pacific’s CEO John Slosar in a recent interview who stated: “There is some thought that some of the changes we see in air cargo may be structural, maybe a permanent movement to sea freight.”

What could the reasons be?

  • Global demand for goods is lower than it has been in the past.  While the US is showing signs of recovery, the EU continues to struggle.  And it seems that whatever demand there is for goods, there doesn’t seem to be as much demand for emergency or just-in-time shipments.
  • A further consideration is costs.  If time is not a factor, then shipping by sea will cost you a fraction, so as a shipper why wouldn’t you want to use a more cost-effective method?
  • Finally even if valuable goods need to be shipped by air, shippers are planning smartly, with a first wave by air and subsequent waves by sea.  Let us not forget that ships are faster these days and cool container technology has come a long way, making it possible for even perishables to be shipped by sea, albeit over smaller distances.

So, if you are an air cargo carrier, what are your options?  Tactically here are a few options to consider:

  • Align your capacity to the new demand levels to reduce spoilage and costs.  There is no point in having more capacity than can be supported.
  • Create better partnership and collaboration with your freight forwarders and become better at forecasting your shipments because, in volatile times, going with your gut feeling or just relying on historical performance can be costly.
  • Ensure you provide the highest service levels for your customers and charge the right rate.  Every marketing professional will tell you that it is easier to do repeat business with a happy, loyal customer than to generate new business.

Strategically, however, this may be the best time to really rethink how you do business.  Companies that are thinking about long-term growth and profitability are doing just that.  They are planning to tear up the rate sheets and negotiated rates which lock them into long term agreements with customers irrespective of changing market conditions and move to a pure market-based dynamic pricing model.

Others are rethinking how they structure allotment contracts so that forwarders bear some of the risk, while some others are wondering if a direct shipper strategy is the right course.

Ocean freight carriers are considering index-linked contracts to smooth out rate volatility so perhaps this could be applied in air freight?  Or, this would be a time to finally streamline operations and ensure that the warehouse processes are aligned with revenue management.

No doubt these initiatives will require investments in time, resources and sophisticated technology.  In today’s tough economic climate this may seem a counterintuitive suggestion, but I believe this to be the right step.

I enjoyed reading Slosar’s quote in the above interview: “One thing that I’ve learnt in my time is that you’re always in the best negotiating position if you’re buying when other people aren’t.”

We all know this economy will eventually rebound and air cargo demand will return, even if the nature of such demand is different than what we are used to seeing.  And what has been proven conclusively is that this demand is fragile – both in good times and in bad times - and the old cliché that the “only constant is change itself” may forever be true in our industry.  The only successful companies in the future will be those that are nimble and are able to adapt to changing conditions fast.

The air cargo industry is notoriously traditional and resistant to change but the industry captains need to challenge themselves and push this industry into this new era.  Those that invest now in new ideas and appropriate technology will ‘storm out of the barn’ when good times return and will be better prepared to ‘ride out the storm’ when the next downturn comes along.  Those that don’t will forever lament about volatile markets, unpredictable and opaque demand, customers with too much control and razor-thin margins.